Economics Group. Special Commentary. September 01, Homebuilders reported improving conditions throughout much of the country. Figure 1.

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1 September 1, 215 Economics Group Special Commentary Mark Vitner, Senior Economist (74) Anika R. Khan, Senior Economist (74) Housing Data Wrap-Up: August 215 Housing Should Provide Some Shelter from Global Economic Headwinds Housing was a notable bright spot during much of this past month s financial market turmoil. Home sales and new home construction both improved, while price appreciation generally moderated across much of the country. Homebuilders reported improving conditions throughout much of the country and many noted that buyer traffic is rising and order backlogs are increasing. Forward-looking indicators, such as pending home sales and mortgage applications, also remain solidly postive, suggesting that housing will gain further momentum during the second half of the year. Moreover, fewer homeowners are in financial distress today than at any other time since the recession ended. The foreclosure rate fell.5 percentage points over the past year, while mortgage delinquency rates have continued to trend lower. While no industry is completely immune to swings in the global economy, housing is fairly well insulated from many of the current issues. The demand for housing is largely derived from the underlying growth in the U.S. economy, which itself is largely driven by conditions within its own borders. The recent improvement in home sales has been driven by improving fundamentals, most notably stronger job and income growth and increased household formations. Attitudes toward homeownership have also gradually become more favorable, reflecting the persistent rise in apartment rents and growing number of millenials reaching the point in their lives where getting married, having children and buying a home tend to increase. Slower global growth may even provide relief to some areas. Home values skyrocketed in many gateway markets, as an influx of overseas buyers coupled with unusually scarce inventories, sharply drove up prices and reduced affordability. Those earlier price gains have shown signs of slowing more recently. Prices for building materials have also eased up and the stronger dollar should help hold down prices for imported materials. Interest rates are also likely to rise more slowly than they would otherwise and mortgage rates should stay lower for even longer. Homebuilders reported improving conditions throughout much of the country. Figure 1 1,65 1,5 New Home Sales vs. NAHB Wells Fargo Index Thousands of Units, SAAR, Index New Home Sales: 57. (Left Axis) NAHB Wells Fargo Index: 6 (Right Axis) 11 1 Figure 2 13 Pending vs. Existing Home Sales Index 21=1, In Millions, Seasonally Adjusted 7.5 1,35 1, , Pending Home Sales Index: 11.3 (Left Axis) 15 1 Existing Home Sales: 5.59 Million (Right Axis) Source: U.S. Department of Commerce, NAR, NAHB and Wells Fargo Securities, LLC This report is available on wellsfargo.com/economics and on Bloomberg WFRE.

2 Housing Data Wrap-Up: August 215 September 1, 215 Lower energy prices should do more good than harm to the housing market overall. Improvement in job growth has bolstered consumer confidence and fueled household formation. Lower Oil Prices May Slow Homebuilding in Texas One area where the slowdown in the global economy could upend home sales is the energy patch, where sales and new home construction has been incredibly strong in recent years. The price of West Texas intermediate crude oil plummeted along with the stock market in August, but ended the month back near $5 a barrel. Texas alone accounts for nearly 15 percent of all new single-family construction and Houston and Dallas rank as the first and second largest markets for new single-family homebuilding in the country. Houston, which is home to the global energy business, is clearly more vulnerable than Dallas, which has enjoyed an influx of major corporate relocations unrelated to the energy complex. Job growth has clearly slowed in Texas, but so far new and existing home sales and new home construction have held up reasonably well. Parts of North Dakota, Wyoming, Colorado and Oklahoma may also see housing demand slow a bit. While parts of the oil patch may see home sales moderate over the next year or so, lower energy prices should do more good than harm to the housing market overall. With gasoline prices falling across most of the country, home buyers are more likely to commute to more affordable areas in the suburbs. This trend favors several major single-family housing markets in the Sun Belt, including Atlanta, Phoenix, Washington D.C., Charlotte, Orlando, Raleigh-Durham and Nashville. Most of these markets are also seeing improving employment conditions and are attracting scores of new residents. All of these markets are huge net consumers of petroleum products and face little to no downside from lower energy prices. Even Los Angeles and Denver, which have some exposure to falling energy prices, have more to gain from lower energy prices than they stand to lose. The underlying fundamentals for housing remain solidly positive. Nonfarm employment has increased by an average of 233, per month for the past two years, following three years where job gains averaged just 154, per month. The improvement in job growth has bolstered consumer confidence and fueled household formation. So far, most of that incremental demand has gone to the rental market, which has enjoyed strong demand for the past few years. The apartment market appears to be close to a peak, however, with vacancy rates expected to trend higher from their cycle low of 4.2 percent and a torrent of apartments currently under construction. We have slightly reduced our forecast for economic growth over the next two years and now look for real GDP to rise percent in 215 and 2.6 percent in 216. Most of the slowing results from a widening in the trade deficit and some weakness in capital spending tied to reductions in oil and gas exploration. Employment growth is expected to remain strong, particularly in the Sun Belt, where few major metropolitan areas have significant exposure to the slowdown in China and reduced energy exploration. New home sales are expected to rise 21 percent this year and 19 percent in 216, albeit off of an exceptionally low base. With little existing inventory, the increase in sales should easily lift singlefamily construction by 12.7 percent this year and 12 percent in 216. Construction would likely rise even faster if more lots could be brought on line more quickly, particularly in areas close to key employment centers. Figure 3 Figure 4 Single-Family Housing Permits by MSA Number of Permits, 215 Year-to-Date Houston-The Woodlands-Sugar Land Dallas-Fort Worth-Arlington Atlanta-Sandy Springs-Roswell Phoenix-Mesa-Scottsdale Washington-Arlington-Alexandria Austin-Round Rock Charlotte-Concord-Gastonia Orlando-Kissimmee-Sanford Raleigh-Durham-Chapel Hill Nashville-Davidson-Murfreesboro-Franklin New York-Newark-Jersey City Denver-Aurora-Lakewood Tampa-St. Petersburg-Clearwater Los Angeles-Long Beach-Anaheim Seattle-Tacoma-Bellevue Las Vegas-Henderson-Paradise Riverside-San Bernardino-Ontario Portland-Vancouver-Hillsboro Miami-Fort Lauderdale-West Palm Beach Chicago-Naperville-Elgin 5, 1, 15, 2, 25, Source: U.S. Department of Commerce and Wells Fargo Securities, LLC Multifamily Starts Multifamily Forecast Single-family Starts Single-family Forecast Housing Starts Millions of Units Forecast

3 Housing Data Wrap-Up: August 215 September 1, 215 National Housing Outlook Forecast Real GDP, percent change Nonfarm Employment, percent change Unemployment Rate Home Construction Total Housing Starts, in thousands ,14. 1,25. Single-Family Starts, in thousands Multifamily Starts, in thousands Home Sales New Home Sales, Single-Family, in thousands Total Existing Home Sales, in thousands 4,11. 4,34. 4,19. 4,26. 4,66. 5,9. 4,94. 5,37. 5,5. Existing Single-Family Home Sales, in thousands 3,66. 3,87. 3,78. 3,787. 4,128. 4,484. 4,344. 4,75. 4,85. Existing Condominium & Townhouse Sales, in thousands Home Prices Median New Home, $ Thousands Percent Change Median Existing Home, $ Thousands Percent Change FHFA (OFHEO) Home Price Index (Purch Only), Pct Chg Case-Shiller C-1 Home Price Index, Percent Change Interest Rates - Annual Averages Prime Rate Ten-Year Treasury Note Conventional 3-Year Fixed Rate, Commitment Rate One-Year ARM, Effective Rate, Commitment Rate Forecast as of: September 1, 215 Source: Federal Reserve Board, FHFA, MBA, NAR, S&P, U.S. Department of Commerce, U.S. Department of Labor and Wells Fargo Securities, LLC 3

4 Housing Data Wrap-Up: August 215 September 1, 215 Housing Starts Building Permits Seasonally Adjusted Annual Rate, In Millions Housing Starts Seasonally Adjusted Annual Rate, In Millions Housing Starts: 1M Building Permits: 1.12M , Single & Multifamily Building Permits SAAR, In Thousands, 3-Month Moving Average 8 Single-Family Housing Starts vs. Mortgage Rates Seasonally Adjusted Annual Rate, In Millions, Percent 12% 11% 1,75 1, % 1,25 5 9% 1, % 6% Single-Family Housing Starts: 782K (Left Axis) Conventional 3-Yr Fixed Mortgage Rate: 4.1% (Right Axis) % 3% 2% 25 Single-Family Building Permits: 684K (Left Axis) Multifamily Building Permits: 551K (Right Axis) NAHB/Wells Fargo Housing Market Index Diffusion Index 1 9 Single-Family Housing Completions Seasonally Adjusted Annual Rate, In Millions Single-Family Housing Completions: 627K NAHB Housing Market Index: Source: NAHB, U.S. Department of Commerce, FHLMC and Wells Fargo Securities, LLC 1 4

5 Housing Data Wrap-Up: August 215 September 1, 215 New Home Sales 1% New Home Sales vs. Mortgage Rates Seasonally Adjusted Annual Rate, In Thousands 1, Inventory of New Homes for Sale Non-Seasonally Adjusted, In Thousands Inventory: 221, Completed New Homes: 46, % 1,5 1, % 1, 6% % Mortgage Rate: 4.1% (Left Axis) New Home Sales: 57. (Right Axis) 3% Months' Supply of New Homes Seasonally Adjusted 14 24% Home Prices Year-over-Year Percentage Change 24% % 16% % % % Median Sale Price: $235,5-24% Median Sales Price 3-M Mov. Avg.: 7.1% FHFA (OFHEO) Purchase Only Index: 5.6% S&P Case-Shiller Composite 1: 4.6% -32% % 1 Median New Home Sales Price Year-over-Year Percent Change, 3-Month Moving Average Median New Sales Price: $285,9 Year-over-Year Percent Change: -.7% -16% -24% -32% 2% 1 Months' Supply: Inventory of New Homes for Sale New Homes for Sale at End of Month, 22=1 Northeast: 85.2 Midwest: 45.1 South: 79.3 West: % 1% % % % -1% Source: U.S. Department of Commerce, MBA, S&P, FHFA, FHLMC and Wells Fargo Securities, LLC 5

6 Housing Data Wrap-Up: August 215 September 1, 215 Existing Home Sales Existing Single-Family Home Resales Seasonally Adjusted Annual Rate - In Millions Inventory of Existing Homes for Sale Existing Homes for Sale at End of Month, In Millions Total Inventory: 4M Existing Home Sales: 5. Million Existing Home Sales Existing Homes Sold During Month, Index, 22=1 15 $3 $25 Single-Family Home vs. Condo Prices In Thousands $3 $ $2 $2 9 9 $15 $15 7 Northeast: 7. 5 Midwest: 95. South: 18. West: Existing Condominium Resales Seasonally Adjusted Annual Rate - In Millions Average Single-Family Price: $279,3 Average Condo Price: $268,2 $ % 3% Pending Home Sales Index Year-over-Year Percent Change Year-over-Year Change: 7.4% $1 4% 3% 2% 2%.9.9 1% 1%.8.8 % %.7.7-1% -1% -2% -2%.5.5-3% % Condo Sales: 63, Source: National Association of Realtors and Wells Fargo Securities, LLC 6

7 Wells Fargo Securities, LLC Economics Group Diane Schumaker-Krieg Global Head of Research, Economics & Strategy (74) (212) John E. Silvia, Ph.D. Chief Economist (74) Mark Vitner Senior Economist (74) Jay H. Bryson, Ph.D. Global Economist (74) Sam Bullard Senior Economist (74) Nick Bennenbroek Currency Strategist (212) Eugenio J. Alemán, Ph.D. Senior Economist (74) Anika R. Khan Senior Economist (74) Azhar Iqbal Econometrician (74) Tim Quinlan Economist (74) Eric Viloria, CFA Currency Strategist (212) Sarah House Economist (74) Michael A. Brown Economist (74) Erik Nelson Economic Analyst (74) Alex Moehring Economic Analyst (74) Misa Batcheller Economic Analyst (74) Michael Pugliese Economic Analyst (74) Donna LaFleur Executive Assistant (74) Cyndi Burris Senior Admin. Assistant (74) Wells Fargo Securities Economics Group publications are produced by Wells Fargo Securities, LLC, a U.S broker-dealer registered with the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, and the Securities Investor Protection Corp. Wells Fargo Securities, LLC, distributes these publications directly and through subsidiaries including, but not limited to, Wells Fargo & Company, Wells Fargo Bank N.A., Wells Fargo Advisors, LLC, Wells Fargo Securities International Limited, Wells Fargo Securities Asia Limited and Wells Fargo Securities (Japan) Co. Limited. Wells Fargo Securities, LLC. ("WFS") is registered with the Commodities Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. Wells Fargo Bank, N.A. ("WFBNA") is registered with the Commodities Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. WFS and WFBNA are generally engaged in the trading of futures and derivative products, any of which may be discussed within this publication. Wells Fargo Securities, LLC does not compensate its research analysts based on specific investment banking transactions. Wells Fargo Securities, LLC s research analysts receive compensation that is based upon and impacted by the overall profitability and revenue of the firm which includes, but is not limited to investment banking revenue. The information and opinions herein are for general information use only. Wells Fargo Securities, LLC does not guarantee their accuracy or completeness, nor does Wells Fargo Securities, LLC assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. Wells Fargo Securities, LLC is a separate legal entity and distinct from affiliated banks and is a wholly owned subsidiary of Wells Fargo & Company 215 Wells Fargo Securities, LLC. Important Information for Non-U.S. Recipients For recipients in the EEA, this report is distributed by Wells Fargo Securities International Limited ("WFSIL"). WFSIL is a U.K. incorporated investment firm authorized and regulated by the Financial Conduct Authority. The content of this report has been approved by WFSIL a regulated person under the Act. For purposes of the U.K. Financial Conduct Authority s rules, this report constitutes impartial investment research. WFSIL does not deal with retail clients as defined in the Markets in Financial Instruments Directive 27. The FCA rules made under the Financial Services and Markets Act 2 for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. This report is not intended for, and should not be relied upon by, retail clients. This document and any other materials accompanying this document (collectively, the "Materials") are provided for general informational purposes only. SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE